“Cash Heterogeneity and the Payout Channel of Monetary Policy”
by Altan Pazarbaşı
Frankfurt School of Finance
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This paper studies the role of corporate cash holdings in the transmission of monetary policy to equity payouts and risk premia. I document that cash-rich firms have higher equity payouts and higher stock prices in response to expansionary monetary policy surprises. Stock prices rise despite weak cash flow, investment, and credit responses to monetary policy, thus suggesting a tight link between observed firm values and the payout channel. I rationalize the empirical evidence in a New Keynesian model where firms finance investment with cash and equity issuance. Monetary easing weakens precautionary cash demand, leading cash-rich firms to allocate excess funds to shareholders optimally. Since payouts are pro-cyclical, cash-rich firms earn higher returns in expansionary periods. My findings stand against the view that the payout channel is undesirable.